Human capital: the undervalued asset in business valuation

Human capital is the foundation from which all intangible assets are created, yet the understanding of how human capital generates value and how to measure it remains less explored compared to other intangible assets.

Modern trends have changed the perception of creating value through human capital. While it used to be regarded as an expense to be managed, it is now seen as an asset that can be invested in.

Today, we can observe transactions involving the acquisition of assets and businesses where gaining access to human capital is a decisive factor.

Accordingly, investors or business buyers need more information to assess human capital and its impact on the company’s value.

The new material from the International Valuation Standards Council (IVSC) addresses issues related to the valuation of human capital.

Human capital is one of four categories of intangible assets that can be created within a company, alongside reputation, databases, and customer relationships. However, it is not capitalized as an asset under IFRS.

As a result, when analyzing companies — especially those operating in the consulting sector — analysis based solely on the statement of financial position and the net asset value method may not reflect the market value of the company. In contrast, an analysis of the income statement and the projection of cash flows generated by such intangible assets can provide a more accurate picture.